Wednesday, March 19, 2014
4:38 PM

Adair Turner, former Chairman of the United Kingdom’s Financial Services Authority, and current member of the UK’s Financial Policy Committee and the House of Lords proposes a need to Rethink the Monetization Taboo.

The Fed’s tapering merely slows the growth of its balance sheet. The authorities would still have to sell $3 trillion of bonds to return to the pre-crisis status quo.

The rarely admitted truth, however, is that there is no need for central banks’ balance sheets to shrink. They could stay permanently larger; and, for some countries, permanently bigger central-bank balance sheets will help reduce public-debt burdens.

If central bank holdings of government debt were converted into non-interest-bearing perpetual obligations, nothing substantive would change, but it would become obvious that some previously issued public debt did not need to be repaid.

This amounts to “helicopter money” after the fact. ...

Permanent monetization of government debts is undoubtedly technically possible. Whether it is desirable depends on the outlook for inflation. Where inflation is returning to target levels, debt monetization could be unnecessarily and dangerously stimulative. Central-bank bond sales, while certainly not inevitable, may be appropriate. But if deflation is the danger, permanent monetization may be the best policy.

Theory vs. Practice

Anyone with an ounce of economic common sense will quickly realize Turner's scheme as just another mindless "print your way to prosperity" proposal.

Monetization of government debt is undoubtedly technically feasible (at least until it isn't) as Bernanke has shown. Yet it promotes a "free lunch" mindset that government debt simply does not matter.

Common sense suggests it cannot work. History shows the same thing.

All sorts of useless projects have already been funded based on "free lunch" idiocies. And every time massive economic distortions occurred due to lack of valid price signals.

Anything and everything seems doable.

Want high speed trains from every city in the US to every other city in the US? Want $100 minimum wages? Want a chicken in every pot?

All of those are "theoretically" possible (for a while) along with funding manned space missions to Jupiter, free healthcare, and even free college education for the masses.

"Practically" speaking, such idiocy has already been tried numerous times. The results speak for themselves: numerous wars, and economic bubble after bubble, each larger than the one that preceded it.

So along comes Adair Turner, proposing a step-up of clearly failed policies.

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